Bitcoin continues to gain trust & respect

In 2011, we discussed Bitcoin, a pure and decentralized digital currency. Introduced in 2009 as a mathematical treatise from a still-mysterious source, Bitcoins already had their own exchange and some retailers were beginning to accept it as payment. Bitcoins are decentralized. That is, they are not issued or backed by any government or bank, and they can be exchanged between buyers and sellers without either party having an account at a financial institution. Yet the supply of Bitcoins are provably limited, the growth in supply is mathematically constrained, spending is untraceable, and the validity of ownership is instantly provable. For these reasons, AWildDuck predicted that Bitcoin would gain steady traction and eventually be trusted as a mainstream form of payment and investment.

A “flash crash” is nothing more than a buying opportunity.

A “flash crash” is nothing more than a buying opportunity.

Of course, as with a new security or exchange medium, the road to maturity is bumpy. Bitcoins have endured wild swings in value, even very recently. These so called “flash crashes” are caused by pre-programmed trading or simply rumors on a day of thin trading. Despite swings in the exchange value, Bitcoin is gradually gaining legitimacy as a vehicle for payment, investment and even as a hedge against regional conflict. Here some things that cause a sudden change to Bitcoin’s exchange value:

  • Programmed trades: These affect any immature or thinly traded security. In fact, they present opportunity for long term investors or anyone less prone to panic.
  • Banking Crisis: Contemporary examples include Cyprus and Greece
  • IRS decision: Recognizing Bitcoin accumulation as a tax reporting obligation
  • Hacker attacks: Bitcoin is safe. These are temporary DDOS attacks
  • Reports or investigations: Anything concerning illegal trade (e.g. Silk Road)

Regional events also drive the Bitcoin exchange value higher, but only because of problems with another currency:

  • Excessive Government Borrowing & Printing: (Japan and USA come to mind)
  • Hyperinflation: South Sudan is currently at 79% while Belarus is at 70%
  • Trade embargo or regional instability: (Iran and North Korea). Citizens seek a safe haven that requires no physical transport and no cash exchange agent.

Are governments along for the ride? Of course not! They try hard to suppress pure, decentralized currency that is impossible to counterfeit, trace or tax. But Bitcoin is gradually becoming legitimized through wider retail acceptance, international currency exchanges, and a broader public understanding of the very positive privacy & security implications. Bitcoin is here to stay.

While it may seem bold to add another radical prediction to our 1-for-1 record, we believe that governments will eventually embrace Bitcoin—or some other pure and decentralized digital currency. In fact, they will halt the minting of their own regional paper and coin currencies—perhaps in our lifetimes. Even governments will one day see advantages of a currency that cannot be forged or directly manipulated.

Bitcoin-2Here is an interesting development: An entrepreneur in Sandy UT has begun minting brass and silver tokens that offer a physical representation of a Bitcoin. They sure look like currency and they come in various denominations. Each coin includes a hidden code covered by a tamper-evident hologram. The code is a hash that helps an owner to verify that the value represented by the minted token has not been used by others.

Of course, this seems to thrash the whole concept of Bitcoins. It raises a litany of contradictions. For example, if it is in your pocket, then it is not truly anonymous. And although you can test the hash to ensure that the coin is valid for the moment, you must trust Mike Caldwell in Utah every day that you carry it. If he were unethical, he could circulate a copy. In fact, he is no different than a central bank, which of course is what Bitcoins render irrelevant. So what’s the point, Mike? …

It would occur to few who understand the decentralized and mathematical nature of Bitcoins to bother with a physical token. It goes against everything that they stand for. Yet, Mike’s mint, casascius.com, offers non-Geeks a reasonable off-line, portable and still somewhat anonymous exchange medium. Most importantly, as long as he can avoid attracting high-tech counterfeiters, his coins offer a medium for those who don’t fully understand how to trust, test or move digital Bitcoins, a “pure” digital currency.

Read more about Mike Caldwell and physical Bitcoins:

Update:
Did Ted Nelson deduce Satoshi’s identity?

Readers who follow Bitcoin or have read about it’s 2008 roots know that it was the embodiment of a paper dropped onto the internet by a mysterious mathematician using the pseudonym Satoshi Nakamoto.

Shinichi Mochizuki

          Shinichi Mochizuki

In May, Ted Nelson, the man who coined the term “Hypertext” (way back in 1963) donned a Sherlock Holmes hat, grabbed a pipe and magnifying glass and did some very clever deducing. Of course, Nelson also reads technical papers by like minded thinkers around the world and this gives him a lot of raw data from which to deduce! He thinks that he has discovered the true identity of Bitcoin’s creator and has made a very convincing video. It ends with a plea for the genius’ next big invention.

I have an alternate theory based on a 1999 visit with cryptographer and DigiCash founder, David Chaum, over a period of 10 days in Palo Alto, CA. But Nelson’s video is compelling. Now I am not so sure which way to lean.